Two major 2020 trends combine in Switchback Energy Acquisition (NYSE:SBE) stock.
The first is the growing use of SPACs, or special purpose acquisition companies, to bring private companies to market. Switchback Energy is merging with privately held ChargePoint, which provides a network of charging stations for electric vehicles in the U.S. and Europe.
The second trend is the proliferation of EV-related investments available to public market investors. Even 12 months ago, EV-related stocks were limited basically to a handful of vehicle manufacturers. Now, battery developers, niche EV makers and component suppliers all have gone or are going public (many through the same SPAC route as ChargePoint).
Both trends unquestionably are positive. It’s good news that investors have access to innovative, fast-growing companies. And the ability to raise equity capital is a big step for the EV industry as a whole.
And both trends drive the bull case for SBE stock. The ChargePoint business model is enormously attractive for one simple reason. And the merger with Switchback sets the financial foundation for growth. Investors might not have had this kind of opportunity a year ago, but they should be happy they do now.
The ChargePoint Business Model
Since its founding in 2007, ChargePoint has built one of the world’s largest networks of EV charging stations. What’s notable about the model is that ChargePoint doesn’t actually operate the chargers.
Rather, the company sells the stations to what it calls “site hosts,” which range from businesses to governments to owners of apartment buildings. Those site hosts pay an upfront fee — along with recurring revenue for software and support.
That model has a pair of positive attributes. First, it’s “capital-light.” ChargePoint won’t have capital tied up in real estate. What cash it needs is used for product development and marketing — two areas that can drive future growth.
Second, recurring revenue provides “smoother” results and boosts profit margins. Selling charging equipment is profitable, but not that profitable. Once the stations are installed, however, and site hosts are either making a direct profit and/or adding to their amenities, those hosts will continue to pay for software. Most of that revenue will drop to ChargePoint’s bottom line.
That revenue should be substantial. In the merger presentation, ChargePoint said that it eventually expects a 1:1 ratio between upfront and recurring revenue. As a result, gross margins will rise from just 13% in 2019 to over 40% later this decade.
The Simple Case for SBE Stock
So there’s a clear path for ChargePoint to grow into a nicely profitable business. Gross margins will expand. Higher revenue will drive operating leverage, as expenses like research and development become an ever-smaller percentage of total sales.
What’s particularly notable is how simple that path is. As the company put it in the merger presentation, revenue growth is “directly proportional to EV penetration.” The more electric vehicles are driven in the U.S. and Europe (ChargePoint already has a presence in 17 countries), the more charging stations are needed and the more revenue ChargePoint generates.
It’s really that simple. And it’s more simple than for EV manufacturers or suppliers. Not all manufacturers necessarily will be winners. Not all suppliers will execute contracts with those winners.
But charging station growth will occur as long as more EVs are sold. And the reason the sector has soared this year is because investors, rightly, believe that EV sales are going to increase for a very long time.
Yet it doesn’t take that much in the way of adoption for ChargePoint to become a very large business. The company estimates it can reach $1 billion in revenue once EV penetration reaches just 3% of the total market.
Obviously, any electric vehicle bull — and at this point, any reasonable investor — believes penetration will move well beyond that point. And so ChargePoint’s revenue should do the same. With gross margins over 40% and reasonable operating expenses, this is a business that should be able to make hundreds of millions of dollars in annual profit.
ChargePoint will book losses on the way to that point. But the merger with Switchback provides over $300 million in cash, which should get the company to profitability.
After the merger, what will be ChargePoint stock will have 305 million shares outstanding. So the current SBE stock price suggests a market capitalization right around $5 billion.
That seems reasonable — and attractive — for a business with this kind of growth opportunity. By the standards of the sector, it seems downright cheap.
Given that valuation, the story here really comes down to execution and the growth of the EV market. On both fronts, investors should be optimistic. If they are, SBE stock looks like a buy.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.